Economic Benefits of the Financial Services Industry in the Cayman Islands

Economic Benefits of the Financial Services Industry in the Cayman Islands February 29 Commissioned by: Cayman Islands Bankers Association Cayman Islands Company Managers Association Cayman Islands Compliance Association Cayman Islands Fund Administrators Association Cayman Islands Law Society Cayman Islands Society of Professional Accountants Insurance Managers Association of Cayman Society of Trust and Estate Practitioners Cayman Branch Cayman Islands Insurance Association Oxford Economics 33 W Lancaster Avenue Wayne PA 1987 : 61.995.96, : 61.995.9611 : www.oxfordeconomics.com

Contents EXECUTIVE SUMMARY 1 1. INTRODUCTION 3 2. DIRECT IMPACTS 5 3. INDIRECT AND INDUCED IMPACTS 7 4. CATALYTIC EFFECTS 11

February 29 Executive Summary The Cayman Islands is widely recognized as one of the most sophisticated offshore centres for financial services in the world. Cayman s infrastructure, stability, and conducive regulatory system have fostered the development of a cluster of sectors related to financial services. This cluster provides a complete suite of services to investors and companies throughout the world. To date, no formal assessment of the economic importance of financial services in the Cayman Islands has been undertaken. (A study of the importance of banking only was conducted in 26.) This study, commissioned by a consortium of associations, seeks to understand the complete economic contribution of the financial services industry (FSI). The definition of financial services is understood to include a cluster of inter-related sectors. These sectors include banking, insurance, legal services, estate & trust, company management, fund administration, accountancy, and related regulation and support (including CIMA, the Cayman Stock Exchange, the Cayman Islands Development Bank, and the Cayman Islands National Insurance Company). Although this expands the boundaries of the core financial services industry, it better reflects the reality of the sector s importance to the Cayman Economy. For example, the vast majority of law firms, company managers, and accounting firms in Cayman focus on financial services. It is estimated that some 95% of their business is directly related to financial services. And insurance companies provide an array of financial services extending beyond insurance alone. The interconnectedness and overlap of services make each of these sectors an integral part of the overall financial services economy in the Cayman Islands. On this basis, Oxford Economics has determined: Financial services generated 1.2 billion in GDP in 27, including direct, indirect, and induced impacts. This represents 55% of the Cayman economy based on the latest ESO estimates of total GDP. Financial services directly employed 5,723 persons in the Cayman Islands in 27. Including downstream impacts, financial services generated employment of 12,63 representing 36% of all employment in the country. Nearly 6% of these employees are Caymanian. Financial services generated personal income of 687 million in 27, including direct, indirect, and induced impacts. Financial services directly generated 24 million in government revenues in 27, or 4% of all government revenue. Over 31, visitors came to the Cayman Islands last year as financial services clients, vendors, or conference participants last year, staying 1, nights and spending 2 million. An additional 4 million was spent by companies to host and entertain these visitors. 1

February 29 Total FSI Impacts share of economy 6% 55% 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % GDP Induced Indirect Direct Employment The financial services industry also provides a range of non-quantifiable or catalytic benefits to the Cayman economy. Real Estate investment 2% of respondents indicated that FSI activity encouraged real estate development Training & Education companies spent over 4 million for employee training & education in 27 ranging from on-the-job training to professional certification and degree completion. Philanthropy the industries contributed CI $2 million to local organizations, funding community events and local charities. A limited review of published programs revealed 46, in scholarships which are offered to Cayman students. Financial Services Industry employees volunteered over 59, hours to local organizations and programs such as Junior Achievement. 2

February 29 1. Introduction The financial services industry is integral to the Cayman economy. It is the largest employer and generator of GDP in the country. Further, financial services supports and drives other sectors of the economy, encourages investment and improves the quality of that investment, provides a secure home for domestic savings and access to capital markets for major businesses, as well as providing high paying job opportunities for Caymanians. Current economic data for the Cayman Islands do not quantify the GDP impact of financial services. Further, a holistic picture of financial services in Cayman should include a cluster of related and interdependent industries. The basis of this analysis is primarily a survey of financial service-related companies. The sponsoring organisations encouraged participation in an online and confidential survey which asked companies about their primary and secondary business activities as well as their employees, revenue (including its repatriation), wages, business-to-business purchases, and community contributions. A copy of this survey is included as an appendix to this report. A sample of 17 companies completed the survey, representing over 3,5 employees, or 7% of all financial services-related employment. The sponsoring organizations also provided total employment estimates for their respective sector which was constrained by the latest ESO Labour Force Survey results. Ratios of employment relative to the sample for each industry were used to project the survey results. It should be noted here that the results of this survey are largely consistent with data produced by the Economics and Statistics Office, while providing significant additional detail. Overall, we find that: Considering its full range of impacts, 55% of Cayman GDP is attributable to the financial services industry, making it the country s single most important industry. Financial service industries support approximately 12,63 jobs in the Cayman Islands, 36% of total employment. Nearly 6% of these employees are Caymanian. The job opportunities in the financial services sector are among the best-rewarded jobs in the country, yielding significant economic benefits as FSI-generated incomes are spent across a broad spectrum of the economy. The rest of the main body of this report considers in detail the contribution that the financial services industry makes to the Cayman economy in terms of gross domestic product (GDP), employment, income, and taxes. 3

February 29 The economic contribution has four components: Direct impacts the output created and jobs supported by firms related to financial services. For the purposes of this study this includes a cluster of inter-related sectors. These sectors include banking, insurance, legal services, estate & trust, company management, fund administration, accountancy, and related regulation and support (including CIMA, the Cayman Stock Exchange, the Cayman Islands Development Bank, and the Cayman Islands National Insurance Company). Indirect impacts these are the effects that occur in the wider supply chain of the financial services industry as these firms purchase goods and services from suppliers in the Cayman Islands. These impacts are felt in real estate, retail trade, utilities, and other suppliers. Care has been taken not to double-count the sales among the firms within the financial services cluster. Induced impacts these are the impacts that arise from the spending by those people employed in the financial services industry and its supply chain. In both the indirect and induced impact analysis, import leakages are accounted for. Catalytic impacts the provision of financial services in the Cayman Islands also facilitates the growth and productivity of other industries. These spillovers or catalytic effects are not always quantifiable but have been assessed from the perspective of the industry. Below, we present each of these effects in turn. 4

February 29 2. Direct impacts The Cayman Islands provides a strong cluster of financial services including banking, estates and trusts, legal services, insurance, fund administration, and accounting. These sectors are concentrated around core financial services and have thus been defined as part of the direct impact. Financial services directly represent 776 million in GDP. This is 36% of the country s economy 1. Banking, accountancy, and fund administration represent the largest components of FSI GDP. It is important to note that overlap exists between these various sectors as many firms provide various financial services. Therefore industry designation is based on a company s primary business activity. FSI Direct GDP Distribution FSI Direct Employment Distribution Accountancy 2% Support 5% Banking 31% Accountancy 14% Support 5% Banking 34% Fund administration 13% Fund administration 13% Insurance 8% Estate & trust 8% Insurance 5% Estate & trust 5% Law 18% Law 21% Financial service industries also sustain more employment than any other economic activity in the Cayman Islands. 5,723 jobs were directly supported by financial services in 27, representing 16% of all employment 2. This figure can be compared to the aggregate of 7,532 jobs within the financial services and business services sectors as reported by the ESO. The ESO figure includes real estate and renting services which accounts for much of the difference. It should be noted that Oxford Economics has also included financial services regulation and support within the Cayman Islands Monetary Authority, the Cayman Stock Exchange, the Cayman Islands Development Bank, the Cayman Islands National Insurance Company and part of the Finance and Economics Portfolio. According to the 27 ESO Labour Force Survey, 71% of employees in the financial service industry (as narrowly defined) are Cayman Island citizens. Within the expanded definition of financial services including its related and overlapping sectors, 59% of all employees within the financial services industry are Caymanian. 1 ESO reports 27 total GDP of 2.14 billion 2 ESO reports 27 total employment of 35,79 and 5

February 29 The nature of employment within the financial services industry generates larger secondary impacts (indirect and induced) than exist within other sectors. There are two reasons for this. Firstly, financial services do not require significant imports of goods and services as operating inputs. Therefore, costs are concentrated in local wages and taxes with relatively low import leakages. Secondly, downstream spending within the local economy is greater for financial services employee than for the rest of the economy. Other industries benefit disproportionately from the spending of financial services employees. These secondary impacts are assessed in detail in the following section. 6

February 29 3. Indirect and induced impacts To understand the full economic impacts of financial services in the Cayman Islands, the linkages and income effects must also be considered. Specifically, financial service companies purchase goods and services from local entities outside of the financial service cluster, generating indirect impacts. In addition and even more important employees spend their financial service-generated income in the Cayman economy, benefiting a range of other sectors via induced impacts. Real estate, utilities, education, transportation, telecommunications, and health care sectors all benefit as recipients of this flow of economic activity. By using an input-output model of the Cayman Islands 3, we calculate the linkages of each component of the financial services sector to other sectors, being careful to net out purchases within the financial services group as well as purchases made from suppliers outside of the country. Imports are also excluded from any impacts of consumer purchases. When including the full range of impacts, the financial services industry generated 1.2 billion in GDP, representing 55% of the economy. This includes 776 million in direct GDP, 16 million indirectly, and 316 million through induced effects. The economic contribution of the 31, visitors to the Cayman Islands on account of financial service is included in the induced impacts. FSI GDP Impact by Sector Millions 45 4 35 3 25 2 15 1 5 Induced Indirect Direct Banking Insurance Law Estate & trust Fund administration Accountancy Support This analysis indicates that for every dollar of GDP within financial services, another 55 cents is generated through the supply chain and incomes that are spent within the local economy. 3 The model used was based on Input-Output analysis of Bermuda and adjusted to reflect known totals for the Cayman Islands. The main assumption was that the relationships of industries to one another and to foreign trade is similar in both countries. 7

February 29 Banking, accountancy, and fund administration represent the largest contributions to FSI GDP, followed by law and insurance services. In should be noted that the indirect and induced impacts by sector are driven by that sector but accrue to sectors outside of financial services. FSI GDP Impact (, 27) Direct Indirect Induced Total Banking 248,948,898 42,818,699 84,51,471 376,269,68 Insurance 63,797,65 6,72,367 18,635,833 89,153,851 Law 136,22,871 3,345,415 58,365,642 197,913,928 Estate & trust 39,14,966 1,57,236 18,566,895 68,278,97 Fund administration 98,85,97 17,661,956 48,5,79 165,13,653 Accountancy 152,317,519 19,1,914 54,782,388 226,2,822 Support 36,232,186 6,231,862 12,383,777 54,847,825 Travel 2,53,996 2,53,996 TOTAL 775,49,997 16,449,45 316,267,793 1,198,28,24 In addition to the 5,723 jobs directly in the financial services cluster of industries, another 1,744 jobs are generated within the local supply chain. The induced impacts are particularly significant for employment given the relatively high incomes within the financial services sector. As a large portion of these incomes are spent within the local economy, another 5,137 jobs are sustained. This implies that for every direct financial services job, another 1.2 jobs are generated. In total, 12,63 jobs are sustained by financial services, comprising 36% of all employment in the Cayman Islands. FSI Employment Impact by Sector 4,5 4, 3,5 3, 2,5 Induced Indirect Direct 2, 1,5 1, 5 Banking Insurance Law Estate & trust Fund administration Accountancy Support 8

February 29 FSI Employment Impact (27) Direct Indirect Induced Total Banking 1,924 72 1,385 4,1 Insurance 31 11 35 725 Law 1,227 55 956 2,238 Estate & trust 435 173 34 912 Fund administration 753 289 795 1,838 Accountancy 8 313 898 2,11 Support 274 12 23 579 Travel 291 291 TOTAL 5,723 1,744 5,137 12,63 Financial services generate substantial personal income in the Cayman Islands including 477 million to those directly employed within its companies. Employees within the FSI supply chain received 45 million in personal income in 27. And the induced impacts reached 16 million for a total of 687 million in personal income, including salaries, benefits, bonuses, and dividends. FSI Personal Income Impact by Sector Millions 2 15 Induced Indirect Direct 1 5 Banking Insurance Law Estate & trust Fund administration Accountancy Support 9

February 29 Financial services also generate significant government revenue. In 27, financial services generated 25 million in government revenue. This was 4% of all government revenue 4. FSI-Generated Government Revenue Import duties 31% Licensing and registration 28% Work Permits 6% Other company fees 25% Mortgage and stamp duties Co. 9% Registration 1% FSI Government Revenue, 27 Licensing and registration 58,241, Banks and trust licenses 24,112, Mutual fund license and reg. 2,65, Law licenses 1,239, Traders licenses* 3,934, Security investment business 1,6, Insurance licenses 6,76, Work Permits 11,274,52 Mortgage and stamp duties 17,75,79 Co. Registration 2,385,218 Other company fees 51,, Import duties 63,994,251 Total 24,6,762 * Includes accounting licences 4 ESO reports total government revenues of 513 million in 27 1

February 29 4. Catalytic effects The catalytic impacts of the financial services and related industries represent the ways in which the economic performance of other industrial sectors is boosted by the activities of the financial services and related industries, other than via the standard analytical direct, indirect and induced impacts set out above. It is difficult to quantify the magnitude of these effects. For some industries, they are likely to be negligible or even zero. But there are good reasons to believe that the financial and related services do generate such catalytic or spillover effects in the Cayman Islands. Some of these impacts tend to be qualitative, or soft, in nature; for example, the ways in which the industry provides support for other sectors of the economy, or the benefits it provides Caymanians. Others are more quantifiable such as training expenditures and philanthropic activities. As a part of this report we surveyed the members of the sponsoring associations in part to ascertain the range and magnitude of these effects. Our analysis of the 17-firm sample reveals that the industries effects are substantial. First the more quantifiable effects can be seen in education/training and community activities. Over 6% of firms surveyed provide external training to employees and nearly half provide formal on-the-job training. Training often includes industry certification and educational reimbursement programs. Of 75 firms providing budget information, over 3 million was spent on training and education in 27. From this, we estimate that nearly 4.3 million was spent on training for the industry in total. Many of the firms in the industry also contribute to local charities, scholarship programs and community events. Of the firms surveyed, nearly 7% contributed either time or financial assistance to such endeavours. Over 59, hours of volunteer time was donated to organizations and mentoring programs. In addition some firms indicate that they encourage their clients, with success, to donate to local charitable organizations. Training & Education % of respondents 7% 6% 5% 4% 3% 2% 1% % 6% 5% 4% 3% 2% 1% Formal OJT Philanthropic Activities % of respondents External training Over 25 separate scholarships are also offered to Cayman students, with a value of 46, 5. % ScholarshipsCommunity Events Local Charities Other Volunteer Hours 5 Source: Oxford Economics, Cayman Islands Chamber of Commerce 11

February 29 Although not quantifiable within the scope of this analysis, the survey revealed several other important ways that financial services benefit the Cayman Islands. Roughly 2% of respondents indicated that the financial services industry in the Cayman Islands improves residents investment opportunities and fosters entrepreneurial development. Benefits to residents % of respondents 25% 2% 15% 1% 5% % Access to financing Investment opportunities Security to savings Entrepreneurial development Nearly 4% of respondents stated that FSI business activity increases investment within the Cayman Islands and promotes overall economic productivity. Promoting Local Business % of respondents 45% 4% 35% 3% 25% 2% 15% 1% 5% % Increase local investment Improve quality Promote productivity/efficiency 12

February 29 Finally, respondents indicated that financial services benefits overall economic development, improves the quality of visitors, and drives high-end real estate activity. Support of other sectors % of respondents 6% 5% 4% 3% 2% 1% % Facilitates development Brings high end tourism Brings RE investors This is evident in data from the Cayman Islands Monetary Authority on the loans made to Cayman households and businesses. 2.1 billion was lent by Cayman banks in 26. 1.3 billion of this was extended to households while 8 million was loaned to businesses. Loans and advances to CI residents (millions) 1,4 1,2 1, 8 6 4 Loans and advances to CI residents (millions) 2,5 2, 1,5 1, 2 5 Agriculture Utilities Wholesale Hotels and restaurants Retail Real estate Construction Other Personal 1996 1997 1998 1999 2 21 22 23 24 25 26 Source: CIMA Source: CIMA 13

February 29 Appendix: Survey of Financial Service Industry Companies The Economic Impact of Financial Services in The Cayman Islands To the membership of: CAYMAN ISLANDS BANKERS ASSOCIATION CAYMAN ISLANDS COMPANY MANAGERS ASSOCIATION CAYMAN ISLANDS FUND ADMINISTRATORS ASSOCIATION CAYMAN ISLANDS LAW SOCIETY CAYMAN ISLANDS SOCIETY OF PROFESSIONAL ACCOUNTANTS INSURANCE MANAGERS ASSOCIATION OF CAYMAN STEP CAYMAN CAYMAN ISLANDS INSURANCE ASSOCIATION The above trade associations ('the Associations') have contracted with Oxford Economics to assess the economic importance of financial services and its associated activities to the Cayman Islands. This survey will take about 5 to 1 minutes and is designed to enable Oxford Economics to assess the direct and indirect benefits of the financial services and related industries. All answers should be for the most recently available fiscal year and in Cayman Island dollars where applicable. This survey is completely anonymous and confidential. No data from any individual firm will be reported or made available to any person or entity outside of Oxford Economics. Data will only be reported at an aggregated industry level. Oxford Economics is operating under a non-disclosure agreement with all Associations in this regard. Direct Economic Benefits 1. What type of Cayman license do you possess? Class A (Bank or Insurance) Class B (Bank or Insurance) Trust Insurance Managers Company Managers Fund Administrator 1

February 29 Other (please state): Not applicable 2. What is your primary business activity? Banking Insurance (captive) Insurance (non-captive) Legal Services Estate & Trust Services Company Management Fund Administration Accountancy and Audit Other (please state): 3. What is your secondary business activity? Banking Insurance (captive) Insurance (non-captive) Legal Services Estate & Trust Services Company Management Fund Administration Accountancy and Audit Other Not applicable 2

February 29 4. What percentage of your gross annual revenue in 27 was generated by this secondary business activity? % 5. How many people do you employ in the Cayman Islands? persons Approximately what percentage of these employees are Caymanian? 6. What is your annual gross revenue ()? Select below or enter gross revenue: % <$1 million $75-$1 million $1-$5 million $1-$15 million $5-$1 million $15-$2 million $1-$2 million $2-$3 million $2-$5 million $3-$5 million $5-$75 million Over $5 million 7. What were your total labour costs in 27 (including benefits, bonuses, dividends,drawings etc.) of your employees in the Cayman Islands? Select below or enter cost: <$1 million $75-$1 million $1-$5 million $1-$15 million $5-$1 million $15-$2 million $1-$2 million $2-$3 million $2-$5 million $3-$5 million $5-$75 million Over $5 million 8. What are your annual expenses related to 3

February 29 facilities (rent, mortgage expenses)? 9. What are your annual expenses for utilities? Telecommunications: Energy, Water, Sewerage: 1. What are your annual expenses on office equipment and office supplies? 11. What percentage of your gross annual revenue is repatriate d to non-cayman entities? % 12. What taxes and fees were directly paid to the government by your company ()? License Fees: Work Permit Fees: Property Taxes/Mortgage Fees: Real Estate Stamp Taxes: Company Registration: Other: Please specify: Indirect Economic Benefits 13. What proportion of your business is provided to resident Caym anians or local businesses? <1% 11%-2% 21%-4% 41%-6% 61%-8% 4

February 29 81%-1% 14. What is the estimated proportion of your clients who also conduct business with the following sectors in the Cayman Islands (outside of your own sector)? Banks % 1-25% 26-5% 51-75% 76-1% Insurance Legal Trust/Estate Mutual/Hedge Fund Accountantcy/Audit Company Managers Other 15. Please provide estimates of international client visits to your offices in 27: How many clients visited you in 27? What was their average travel party size? What was their length of stay? What percentage used hotels? What percentage met with other companies besides your own while in Cayman? How many of your clients are property owners in Cayman? What were your company's expenditures on client entertainment in the Cayman Islands in 27? persons persons days % % % 5

February 29 16. How many employees, partners and vendors from offices outside of the Cayman Islands visited your offices in 27? Visits? Average travel party size? Average length of stay? What percentage used hotels? persons days % Catalytic Economic Benefits 17. In what ways does your business support other sectors (e.g. tourism, real estate, construction)? Facilitates hotel and related real estate development Brings high-end visitors to the Cayman Islands for tourism Brings high-end real estate investors to the Cayman Islands Other (ple ase describe): 18. What sort of training and education programs do you provide? Formal on-the-job training programs Formal external training Informal on-the-job training Other (please describe): What was your annual budget for training & education in 27?: 6

February 29 19. What philanthropic and community contributions did your company make in 27? Scholarships Amount: events Community Amount: Local charities Amount: Other Amount: 2. How many hours did your company's employees contribute to volunteer activities in the Cayman Islands in 27? e.g. Junior Achievement, mentoring programs etc. hours 21. In what ways does your business benefit residents of the Cayman Islands? Provides access to debt Provides investment opportunities Provides greater security to savings Facilitates entreprenurial development Other (please describe): 22. In what ways do your services support the local economic activity of your customers? (please check all that apply) Leads them to increase their investments in the Cayman Islands 7

February 29 Leads them to improve their investents in the Cayman Islands Promotes business productivity/efficiency Other (please describe): Thank you for completing the survey. Please press the Sub mit button. Submit Copyright September 28 Oxford Economics Ltd - All rights reserved. Privacy / Disclaimer 8